Big Law: “Skate to where the puck will be”

February 10, 2009

The picture is bleak. After years of tremendous revenues and profit per partner growth, upheaval in the credit markets all but dried up the flow of M&A deals, the lifeblood of corporate law practice and a substantial source of revenues for large law firms everywhere. With so much pain and fear, should law firms do anything but batten down the hatches? As the owner of a professional services organization myself, I understand the need to be cautious. But I also see an industry that is heading for renewed growth sometime in the next 6-18 month. Lack of credit and dramatic uncertainty (now coupled with meltdown in the financial markets – a large source of revenues for law firms) is hurting ‘big law’. Here in Canada we had a grace period. We’ve managed to avoid some of the pain. But commodities and energy markets, the under-pining of the Canadian economy, are now in a recession, and therefore lower demand. Gravity takes its toll everywhere. From my vantage point as a  consultant to large law firm, I see troubling issues as well as a dawn of new opportunities. Unlike some who see a silver lining in the form of mounting bankruptcy work, I doubt that troubled times related work will completely replace the ultra lucrative ‘deal making’ side of corporate law. When a very large multi-national is about to be bought or merged, there’s little choice but to employ a large team of lawyers in order to manage risk, paper legalities and perform complex due diligence. It’s a fiduciary responsibility at the highest levels of management and directorship. Spending (or investing) 10 million in legal fees is therefore considered a ‘no brainer’. while there’s little doubt that bankruptcy work increases in hard times I doubt that it will increase enough to compensate for the revenue shortfall from the shrinking deal flow. Recent resesarch indicates as much:

…The conventional wisdom has been that litigation work, which represents nearly a quarter of the revenue generated by the legal industry, increases in economic downturns. But the West Peer Monitor Economic Index, a survey of law firms around the nation, shows that while demand for bankruptcy and regulatory work grew, litigation declined 2 to 5 percent in each of the past 10 months. Mark Medice, who oversees the survey, attributed the decrease to cost-conscious corporations curtailing their legal filings…

Law Firms Tightening Belts — By Request. By V. Dion Haynes. Washington Post Staff Writer

In contrast with this less than happy situation, my humble prediction is that the market is starting a build-up towards a crescendo in corporate legal services and It’s about 6-18 months away. There’s a strong probability that the credit crunch, the very issue that stemmed the tide of corporate acquisitions, will be resolved due to global efforts now under way. Flow of capital and credit, some of which is sitting on the sidelines, will come back into the market. Hungry, opportunity seeking buyers will be looking for great deals. The financial work WILL sort itself out. The vacum created by the demise of venerable names like Lehman Bothers and AIG is palpable. As a result, things will heat up again in corporate law. In fact, I also predict that for some firms, residual business from downturn related activities (as an example, legal work related to government funding now made available to large financial institutions all over the world) could result in a lucrative overlap between the two types of legal activities.

Warren Buffet’s weekend op-ed in the New York Times expressed confidence in the future of the American economy and specifically, equities as a source of growth and wealth. Not withstanding his role as an American patriot and cheerleader for its ailing economy, his quote of Wayne Gretzky’s adage: “skate to where the puck is going to be, not to where it has been” was indeeed timely. While some firms cut back on ‘nice to have’ expenses like premium cookies and Starbucks coffee, or more serious fire lawyers and associates, others are hunting for merger opportunities. Judging from recent history of downturn cycles,  those with vision and fortitude will be better positioned for the next upswing. As always, it’ll come quicker then most think.


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